The Third Way of Entrepreneurship steers a middle course between the unregulated pursuit of lower-level interests (laissez-faire) and centralized planning. It’s not as if markets have no role to play, but they must be structured so that the three ingredients of a cultural evolutionary process—selection, variation, and replication—are managed to achieve whole-system goals.
The first three conversations of this series feature distinguished historians and economists: Trygve Throntveit on the tradition of Pragmatism in America, Geoffrey Hodgson on the history of Socialism and Capitalism worldwide, and David Colander on the history of economics in relation to public policy. This conversation features another distinguished economist: Peter Boettke, University Professor of Economics and Philosophy at George Mason University. Peter also directs the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at GMU’s Mercatus Center.
The word mercatus is Latin for “market” and F.A. Hayek is a hero of free-market advocates. Hence, if anyone is qualified to speak for the essential role of markets in the Third Way of Entrepreneurship, it is Peter Boettke.
David Sloan Wilson: Greetings, Peter! I’d like to begin by recounting the history of our interaction, which began when I published an article in the online magazine Evonomics.com titled “The Road to Ideology: How Friedrich Hayek Became a Monster”. The point of my article was that Hayek exists in two versions, a sophisticated version that was the actual person and a monstrous version that lumbers around saying “Government bad! Markets good!” The monstrous version is creating havoc, like Frankenstein’s monster. And professional economists who know better, like the good Doctor Frankenstein, don’t seem to be able to rein the monster in.
Well! The Twitter-verse erupted as if I was the monster, but you took me seriously and invited me to give a talk at the Mercatus Center, which is available in a second Evonomics.com article titled “The Libertarian Economist Friedrich Hayek Gets a Makeover”. You also invited me to other forums, including a workshop that I describe in a third Evonomics.com article titled “The Invisible Hook: How Pirate Society Proves Economic Self-Interest Wrong”, which draws upon the work of your GMU colleague, Peter T. Leeson.
I will always be grateful to you for your welcoming attitude, which represents the best of constructive intellectual discourse.
When I invited you to have this conversation with me, I tagged you as Libertarian and you replied: “I would love to have a conversation with you, but not as a Libertarian per se…I don’t consider myself a first-principle Libertarian…I am an economist and political economist primarily with strong liberal sensibilities.” You also took the time to read the previous three conversations, so that our own conversation can be maximally informed.
With that long-winded preamble, please introduce yourself in your own words—realizing that our audience will be exceptionally diverse. Some will already know of you, but others will not.
Peter Boettke: First, thank you, David, for inviting me to this conversation. What I mean by first-principle libertarianism is the effort to derive a complete political philosophy from working out the logical implications of some notion of natural rights and a non-aggression axiom. I am an economist and political economist who studies the consequences of alternative institutional arrangements on the ability of individuals to live better together. In short, how institutions shape our social interactions with each other.
I started my career studying the history and operation of the Soviet political and economic system. I was able to publish three books in that area and edit a 9-volume reference accumulating a century of work on the theory and practice of socialist economic planning. This work also enabled me to travel in East and Central Europe and the former Soviet Union as a Fulbright Fellow in Prague, as a Visiting Fellow at the Academy of Sciences in Moscow and the Max Planck Institute in Germany, etc. By the early 2000s, my work was focused on the political economy of development economics in general, with the transition from socialism being a subset of a larger program to fully incorporate institutions into the analysis.
From the beginning of my studies, largely under the influence of my professors, my work always sought to examine economic processes within political/legal and social/cultural institutions. Readers can find a summary of this idea by looking at the Medium essay summarizing our work on the response and recovery in the aftermath of Hurricane Katrina.
DSW: Excellent! Disaster recovery is a perfect context for considering the thesis of the Third Way. We will return to it, but for now please continue to introduce yourself.
PB: In addition to my work in comparative institutional analysis of human sociability, I also am active in the fields of history of economic theory and the methodology of the social sciences. In my undergraduate course of study, we had to take a year of history of economic thought for our major. This course included reading not only Adam Smith, David Ricardo, J. B. Say, and J.S. Mill, but Karl Marx, Thorsten Veblen, John Maynard Keynes, and John Kenneth Galbraith. So back to your introduction to our conversation, I was taught very early on that scholarship in political economy is about the great contested conversation through the ages. When I showed up to pursue graduate studies, I had the great privilege to study with Kenneth Boulding — the 2nd Clark Medal Winner after Samuelson, and a master historian of thought, and creative innovator of evolutionary economics. I also came under the influence of Warren Samuels at Michigan State. Even though he was not my direct professor he took me under his wing from afar due to a paper I wrote in my first year of graduate school. Warren taught me much about this profession as a scholar, as an editor, and as a mentor. Again, Warren was a facilitator of that contested conversation and I think your readers would benefit greatly from reading a sampling of Boulding and Samuels as they contemplate the ground you are encouraging them to explore.
Obviously, my most direct influences came from my professors at George Mason University, and in particular Don Lavoie and James Buchanan, but also Karen Vaughn and Viktor Vanberg. Again, from them, I learned scholarship was as much about charity and respect, as it was about critical engagement. You read others with charity, you respect alternative perspectives, and you treat nothing — including your own ideas — as sacred.
My book Living Economics discusses many of these individuals and their contributions.
As one last bit of introduction that is relevant to our conversation about the Third Way of entrepreneurship is that recently I published a book on Hayek for the ‘Great Thinkers in Economics’ series, and I just finished the editing of the Collected Works of Israel M. Kirzner (10 volumes), who along with William Baumol is the scholar most responsible for bringing the entrepreneur back into modern economic theory. In the book on Hayek, I try to not only describe the arc of Hayek’s intellectual path but to counter many misinterpretations of Hayek that have been perpetuated in popular discourse.
DSW: Thank you! Your credentials are awesome and on a par with my previous conversation partners, Trygve Throntveit, Geoffrey Hodgson, and David Colander. It will be fascinating to contrast your perspectives, especially because you have read these conversations in preparation for ours.
As you know, this series is centered on entrepreneurship but also places it within a larger context of positive cultural change of all sorts and at any period of history. Let’s begin with the basic thesis of the Third Way, which is that laissez-faire and centralized planning don’t work and the only thing that can work is a process of cultural evolution managed to achieve whole-system goals. Does this thesis strike you as sound?
PB: So much of this conversation turns on us agreeing to terms and their meaning. Centralized planning meant something very specific, and it had very clear goals in mind. In its most coherent presentation, it required the abolition of private property and commodity production; the substitution of production for direct use, rather than exchange; with the goal of rationalizing production in order to move society from the “Kingdom of Necessity” to the “Kingdom of Freedom”. Once that is achieved, the claim is, that social conflict will disappear and social harmony will reign. But as I said, I began my career studying this idea, its history, and its critical flaws in great depth. And, it is doomed precisely as Hodgson points out in his conversation with you.
DSW: Excellent! By which I mean, excellent that you agree with Geoff Hodgson! However, I’d like to broaden the meaning of centralized planning to include any attempt to understand and influence the behavior of a complex system without the experimental approach represented by the Third Way. Examples include complex engineering problems, natural resource management, and the management of even a moderately sized business, in addition to national governments. Response to a natural disaster is another context for evaluating the performance of centralized planning, as we will get to. With this in mind, let’s proceed to laissez-faire.
PB: Laissez-faire is less clear in its meaning. From Adam Smith to F. A. Hayek, no serious thinker who is considered an advocate of laissez-faire ever presented their views in a way that critics often present them. Adam Smith never said self-interest always resulted in social benefits, it only did so under very specific institutional environments. And, methodological individualists like Ludwig von Mises or F. A. Hayek never denied social wholes or collective action, they explicitly rejected atomism and sought instead to develop a theory of social cooperation.
But, these misperceptions have to be tackled and not simply dismissed. We have to ask what in these writings could give rise to these misreadings of Smith and Hayek. That requires patient and serious scholarship and clarity of thought and exposition. But that is probably better discussed at another time. Your project should be the focus of our conversation.
DSW: True, but I’d like to suggest that one cause of these “misreadings” is not some shortcoming of the authors but the tendency of individuals and corporations to justify their own benefit as for the good of society. Those intent on showing that “greed is good” can pick out support in the corpus of almost anyone’s work—even the Bible. Perhaps we’ll return to this later.
PB: You and I had a professional association with Elinor Ostrom. I was in contact with both Lin and her husband Vincent since my graduate student days in the mid-1980s, and they both greatly influenced my work in comparative institutional analysis. In the early 2000s, I wrote an overview of their shared research program that was published in the Journal of Economic Behavior and Organization, and in 2009 I published a book Challenging the Institutional Analysis of Development. These came out prior to Lin’s Nobel, so for a few years, I was also asked to provide overviews of Lin’s work in various venues. In 2019, I published a book on Public Governance and the Classical Liberal Perspective, which also lays out the Bloomington School perspective and its relationship with the Austrian School of Hayek and the Virginia School of Buchanan.
As Lin summed up her position in her Nobel, this research program seeks to move the discourse beyond the market and state dichotomy. A major theme of the work of my colleagues and myself have been this exploration of not only political/legal institutions but the social/cultural institutions. Community, simply put. Ragu Rajan published a book in 2019, The Third Pillar which argues that we need to get beyond the focus on markets and states and focus on the role of community and what makes for strong communal bonds and caring communities within which we live together. Richard Cornuelle, who was a mentor of mine, spent his entire career exploring what he called the Independent Sector, and what would later be dubbed social entrepreneurship.
Besides Rajan’s book, the recent work of Acemoglu and Robinson — The Narrow Corridor — puts fundamental questions of the institutional infrastructure conducive to peaceful social cooperation, and productivity and prosperity. To achieve a “good society”, social rules must be adopted and practiced that curb predatory capacities and enhance cooperative capabilities. This requires entrepreneurs in both the private and public sectors, as well as in that independent sector. In the work of our research group at GMU/Mercatus in transition studies, in development, and recovery after war and disaster, we have focused for over 20 years on the interaction between the political/legal, economic/financial, and social/cultural sectors, and the formal and informal rules that provide the necessary governance for social interaction.
Walter Lippmann’s The Good Society argued for an Agenda for Liberalism, and both Henry Simons and F. A. Hayek consistently talked about the positive program for laissez-faire. As tensions continue to rise over inequality and injustice, and inefficiency and imperfections of modern capitalism, I do think your readers would benefit greatly from looking at works from Luigi Zingales and Randy Holcombe as well as Joseph Stiglitz and Thomas Piketty. The governing dynamics of political capitalism is not the same as the capitalism that the Scottish Moral Philosophers, nineteenth-century liberals, and early neoclassical economists envisioned. But political capitalism, just as the Mercantilist predecessor, is a rent-seeking system that utilizes the predatory capacity of the state to privilege some at the expense of others in the economic system. This is a system that does perpetuate inequalities and injustices and does result in persistent inefficiencies and barriers to individuals realizing mutual gains from trade and social cooperation.
I hope by your cultivation of this conversation we can continue to make progress on understanding the entrepreneurial role in ensuring human sociability and on the basis of that knowledge perhaps make the changes required to improve not only our science but increase the odds that we can achieve a more humane society and just society.
DSW: That is also my hope. Let me summarize our conversation so far. You, along with my previous conversation partners, are in agreement about the failure of centralized planning. At the level of national governance, centralized planning is something that has been tried and has failed. You’ve also described your own position, along with great thinkers such as Adam Smith and Friedrich Hayek, as far more sophisticated and nuanced than pure laissez-faire. When we dive deeper into your own approach, in contexts such as disaster recovery and police departments, I’m guessing that your way will be close to the Third Way. But first, I want to spend more time on laissez-faire.
I want to say that just as centralized planning is something that has been tried and failed at the level of national governance, laissez-faire is something that has been tried and failed. Laissez-faire is the belief that free enterprise is the primary source of innovation and societal improvement, that the role of government is to provide an arena for free enterprise and otherwise get out of the way, and that public services should be privatized whenever possible. Laissez-faire is the belief that the only social responsibility of a company is to maximize profits for its shareholders. Even if this is a misreading of Smith and Hayek, it was the explicit maxim of Milton Friedman, enthusiastically adopted by business corporations around the world and by political leaders such as Ronald Reagan and Margaret Thatcher. As you know, the group of corporate heads called the Business Roundtable made the news last year for saying that shareholder value is “no longer everything”, as the headline of the New York Times business section put it.
Advocates of laissez-faire sometimes say that if it has failed, it is because it wasn’t implemented strongly enough. Not only is this something that Smith and Hayek would never endorse, but it can be rejected on the basis of modern evolutionary and complex systems theory. It is simply deeply untrue that the unregulated pursuit of lower-level interests robustly benefits the higher-level common good in real-world social and economic environments.
In short, laissez-faire is a major policy narrative, whatever its theoretical underpinnings, and when it is strongly put into practice it results in failures. The failures are of a different sort than the failures of centralized planning, but they are failures nonetheless. This is why the Third Way is needed to steer a middle course. If you agree with Geoff Hodgson and my other conversation partners on centralized planning, do you agree with them and me on laissez-faire?
PB: Well, David, I think you and I would disagree about the interpretation of history with regard to laissez-faire and free enterprise. I do not believe we have experienced a period of pure laissez-faire during the period you are pointing to — I see instead a world of a permanent war economy, manipulation of money and credit, and rent-seeking society that privileges some at the expense of others — all of which distort and damage our politics, our markets, and our society. In essence, Power and Privilege have been amassed in an effort to govern over, rather than a self-governing democratic era where we dissipate power and deny privilege and seek to govern with each other as dignified equals. True liberalism in this sense would be seen as the emancipatory philosophy that it was written to be — seeking to eradicate the bonds of oppression imposed by the Altar, the Crown, the Sword, and from both crushing poverty and the protected privileges of the mercantilist class. But I am not sure in this space we can resolve our disagreements concerning liberalism and laissez-faire.
So, let me instead look for common ground. As stressed by Lin Ostrom we must study social reality as a nested game, there are always games within games at multi-levels. At each node in the game, there are incentive structures and information generation, communication, and utilization. When we get beyond the dichotomizing of the State and the Market, we enter into this entangled world that I would (following my brilliant colleague Richard Wagner) argue is political economy. See Wagner’s Politics as a Peculiar Business (2016). The simplest way we can think about this is with the following categories: rules and strategies; situations and preferences; and, then, of course, drawing on your field, variation, and selection. There is a logic in all of this that we must pursue. Each of these analytical catch-phrases can be weaved together to study our lived reality in the entangled web of politics, commerce, and society. This actually isn’t a new research program, but a careful reading of Max Weber would show that he already was pointing us there in his “interpretative sociology” and the development of “economic sociology”. The book by Richard Swedberg, Max Weber and the Idea of Economic Sociology is a great source for this, and the idea of how we must account for, to use older language, the Crown, the Altar, the Sword, and Money in our quest to understand the human condition.
DSW: Awesome! You are providing a trove of information in your book suggestions. In biological and evolutionary terms, I would describe all of this complexity as the anatomy and physiology of a large-scale society, which somehow needs to be brought into being.
PB: Let’s take Milton Friedman’s the only social responsibility of business is to maximize profits bogyman, or his supposedly scandalously myopic quip to the Chinese in 1979 that the answer to their economic woes was privatize, privatize, privatize. First, think through the exercise of the logic of choice and the situational logic involved in Friedman’s claims. There was a lot of loose thinking behind the outrage about business profits, and so Friedman was trying to discipline the conversation with the situational logic of economic analysis. What would it mean for that firm to maximize its profits, what would that entail in terms of consumer satisfaction, the utilization of resources, the returns to shareholders, etc.? It turns out that if you pursue that logic, you would see that the goals of the critics would be better served by Friedman’s means, then by the means that they are proposing. But only under certain specified conditions. Which brings me to the next point. Second, Friedman qualified both statements over the years to clarify that these claims were institutionally contingent claims, not universal claims. They depended on certain legal arrangements and widely shared moral attitudes. Again, self-interest does not automatically translate into public interest outcomes; if that was the case it would mean that they were proposing a social science form of alchemy. Instead, the great political economists from Smith to Hayek (including Friedman) were social science versions of biologists, and to some extent chemists as the different combinations of the elements they study produce the transformation. There is in essence, a claim being made about a certain combustible combination between ideas and institutions that produces the various outcomes we witness in the real-world. Shortly before his death, Friedman was asked about his 1979 quip to the Chinese and his response was yes, privatize, privatize, privatize provided there is a rule of law. Doesn’t that change everything in some sense, David? Similarly, if the rules of the game (set by financial authorities) reward firms for quarterly returns rather than long-run growth, the managers of those firms will respond. And, in ways, we might find socially dysfunctional from the perspective of the common good. But, if the rules change, the managers’ best strategy responses will change. In other words, the causal factor we want to identify is the institutional context of human decision making and human social interaction, not the behavioral characteristics of the actors engaged in the social game. As Lin again always stressed, the devil is in the institutional details.
To conclude this, I think the social world is a complex web of interrelationships and interdependencies, and that we need to approach our studies with the right set of theoretical tools and sensibilities. The rhetoric used in politics and in social criticism often isn’t precise and clouds our understanding rather than clarifies. We as social scientists must pierce through these clouds of misunderstanding, and seek to unearth the underlying governing dynamics. I personally believe that is to be found in institutions and their impact on individual and group decision making. It is not the preferences or motivations of the actors that is the problem, it is the playing out of those under certain rules of the game (which are both formal and informal). Self-interest (even incorrectly understood) can be transformed into the public interest if we are playing the game under certain conditions. We are not playing the game under those conditions. As a result, even altruistic intentions can go awry, and end up generating consequences that are seen as wholly negative from the point of view of those high ideals. In short, I prefer explanations of our social ills that focus on the dysfunction caused by the operating rules of the game, rather than the behavioral characteristics of the individuals and groups playing the game. This imposes a certain discipline on us, as Lin stressed in Governing the Commons, that I fear is too often lost when we depart from that mode of analysis. But as my opening to this question states, I agree that there are a lot of serious issues and problems in the world that we must study and find solutions to, I just think we have a different understanding of who the culprit is both at the level of ideas and at the level of policies. It requires more discussion and open conversation to sort out.
DSW: Great! Now we’re really seeing eye to eye. Allow me to play it back in my own words and add certain emphases. One thing you are emphasizing is the malleability of human behavior. People respond to incentives or selection pressures in evolutionary terms. Therefore, if you want to get people to behave for the common good, then provide the right incentives. This is the essence of the Third Way as a managed process of cultural evolution.
However, the human mind is much more complicated than a blank slate. A better analogy is that the human behavioral system is like the immune system, with both an innate and adaptive component. The innate component is a sophisticated set of psychological mechanisms that evolved by genetic evolution and are triggered by environmental events but do not change during the lifetime of the organism. The adaptive component is the more open-ended ability to behave flexibly, to ramp up the behaviors that are rewarding and tamp down the behaviors that are punishing. The two components operate in conjunction with each other in ways that we are only beginning to scientifically understand. We know much less about the human behavioral system than the immune system, in part because we are only beginning to see them as comparable to each other. This means that entire academic disciplines beyond economics need to be consulted, integrated with each other, and included in the process of managing cultural evolution in real-world settings. My books on this subject include This View of Life: Completing the Darwinian Revolution, Evolution and Contextual Behavioral Science: An Integrated Framework for Understanding, Predicting and Influencing Human Behavior (with Steven C. Hayes), and Prosocial: Using Evolutionary Science to Build Productive, Equitable, and Collaborative Groups (with Paul W.B. Atkins and Steven C. Hayes).
In addition, Friedman’s phrase “rule of law” does not adequately describe what is required to manage cultural evolutionary processes for the common good. No top-down imposition of formal laws enacted by politicians and financial authorities will do the job by itself, as you yourself emphasize in other parts of this conversation. Thus, if we agree that our ideas about human malleability require going beyond the blank slate and managing cultural evolutionary selection pressures requires going beyond “rule of law”, we are seeing eye to eye.
Now let’s focus in more detail on what can and does work in real-world settings. I describe it as a process of cultural evolution in which all three ingredients—selection, variation, and the replication of best practices—are managed to achieve systemic goals. I’m eager to see how this compares to your approach, based on your own theorizing and empirical research. Let’s begin with disaster relief and recovery. When a natural disaster strikes a large region, such as Hurricane Katrina laying waste to the US Gulf Coast in 2005, a systemic effort is required to provide immediate relief and long-term recovery. You and your associates made a study of what happened in the aftermath of Katrina, which you describe as woefully inadequate. Very briefly, what went wrong (for more detail, readers should consult the aforementioned medium.com article)?
PB: Great question. First, let me give two economic references that might help with thinking through the logic. J. S. Mill in Principles of Political Economy observed how fast communities can rebuild in the wake of natural disasters or man-made disasters such as war, provided that all the human capital was not wiped as a result and that there was free mobility of labor and capital. In less than a generation, he argued, communities bounce back after the ravages of disaster. And, during WWII, George Stigler received a letter from Tjalling Koopmans, who was concerned that Stigler had written a white paper arguing that in the case of a bombing of New York City, the price system rather than government planning should be utilized to guide the response. Stigler wrote back informing Koopmans that he did not write such a paper, but then explained on second thought that perhaps he should have, noting that an unexpected bombing would destroy any centrally planned coordination mechanism, but an expected bombing would not. In the case of an unexpected bombing, the price system would be more nimble and adaptable than any government planning bureaucracy ever could. Economists do have a tendency to want to produce arguments to shock their readers out of complacency. We also produce arguments about the beauty of social cooperation, about the hope provided by entrepreneurial innovation and changes in the governing rules, and with compassion for the least advantage in society. It is a huge error committed by both economists and their critics when they focus on the shock aspects of their claims to the truth and light of economic analysis to the exclusion of the others.
DSW: Right! The words “beauty”, “hope” and “compassion” are seldom associated with economics and should be! I am unhappy with the Stigler and Koopmans, story, however. A system that is well designed to recover from an inherently unpredictable event such as a bombing would need to have certain properties, such as being decentralized, drawing upon the local private sector by making resources from tax dollars available, and so on. Such a well-designed system could be constructed by a government and indeed might require a degree of government involvement to put everything in place. There is an important distinction between designing a social system and participating in a system that has been designed. The conversation between Stigler and Koopmans seems to assume that government planning must take the form of a clunky centralized system, which need not be the case. My conversation with Dan O’Brien on the smart cities movement dives into this subject in detail. But please continue…
PB: Armed with economic analysis and a broad notion of political and cultural economy, we went into the field to study the response and recovery in the wake of a natural disaster. We sought to give voice to the actors on the ground in civil society who responded so bravely to save lives and to give due to the public actors who played a vital role as well during those times. In reality, post-disaster discussions spent too much time on the public sector, and not enough time highlighting the civil society response. But during the response phase, the public sector is critical to the endeavor, as is civil society and commercial society. For example, the role of Walmart and other big retailers in aiding response and relief efforts is often overlooked.
DSW: The main take-home point here is that all sectors are important and must be coordinated with each other.
PB: We spoke with a variety of on the ground actors in our research from the public sector, the private sector, and civil society. We wanted to focus on the creative and clever ways that these different actors overcame the significant coordination problems that they confronted during the response and relief effort, but definitely during the recovery and rebuilding effort. And, we sought to identify those barriers that either were in place or emerged in the process, that slowed recovery and rebuilding. This is simple things like occupational licensing, more complex things like redrawing of the floodplain maps (which the Army Corps of Engineers took so long to do), and even more entangled complexity related to FEMA and the peculiar business of politics (including corruption issues). But if you read the various studies our group produced, we focus a lot on the on-the-ground social entrepreneurs in churches and in communities that drove the recovery and rebuilding of greater New Orleans. This was where we find, I would argue, the creative problem solving, and the compassion to aid the less fortunate and the commitment to community. What makes for a resilient community? Active and engaged citizens who are committed to that collective endeavor, and in their efforts they draw on resources and energy provided by the commercial sector as well as local public sector actors. Again, this is an Ostrom point about public entrepreneurship and polycentric order.
DSW: Absolutely! Allow me to play this back in explicitly evolutionary terms. When a disaster strikes, the people who are impacted scramble into action as best they can, not just as individuals but as groups of all sorts—businesses, churches, neighborhoods, local governments, etc. Hopefully, there is a public sector infrastructure in place based on previous disasters, including disasters at other locations, resulting in storage depots, evacuation plans, law enforcement response, rescue teams, and the like. This is a process of cultural evolution at the national and international scale (if it includes an evaluation of best practices from other nations), that manifests itself at the local scale. However, all of this might not work well in a particular disaster. It is, therefore, necessary to mount a rapid variation-and-selection process at the disaster site, which is what you did, monitoring primarily unplanned variation but perhaps with some planned variation as well (e.g., A/B testing in the field). After the disaster, there would optimally be a review of best practices to increase preparedness for the next disaster, both at the disaster site and other locations. This is a managed process of multilevel cultural evolution in action.
In your article, you describe this process in your own words as a three-legged stool. Please say more about this.
PB: The three-legged stool idea emerged from my earlier work on the transitional political economy of post-Communism during the 1990s, and it refers to the interaction between the political/legal, economic/financial, and social/cultural sectors. My idea — laid out in a theory of what I called “Robust Political Economy” — was that a social system had to be robust against dysfunctions and strains and pressures put on the system due to knowledge problems, power problems, opportunism with guile, arrogance of the anointed rulers, and crisis born of natural or social causes. The stool is sturdy if, and only if, when you place the burden of these on it, it can still stand and continue to function, but if it topples that is because one or all of the legs are weak, or the ties between them have broken down. In order for a robust political economy to emerge, we need strong and sturdy legs in the political/legal, economic/financial, and social/cultural dimensions.
This idea was applied to post-communism, developing economies, and post-war reconstruction (see the outstanding work of my colleague Christopher Coyne, e.g., After War (2008)). In the early 2000s, I worked out the conceptual framework of this approach with my close colleague Virgil Storr, whose own work focuses on cultural and moral issues (see his Understanding the Culture of Markets (2012)). The problem with post-communism, developing economies, and post-war reconstruction is that the process of building “the three-legged stool” is endogenous to the process of transition. The reason why we start from where we are is that the stool collapsed for a variety of reasons, and now must be rebuilt. That cannot be built from afar, and it cannot be assumed away. This is what led theoretically to our various explorations as a group of scholars between 2000 and 2010 on what I called analytical anarchism, which is not a normative notion of the idea, but an analytical and historical examination of endogenous rule formation in a variety of social situations. And, our goal was to “test” that idea in non-ideal situations. In the standard economics and political science analysis, cooperation emerges easily among groups where we have small numbers, homogeneous agents, who possess low discount rates. But in the social situations we sought to study, we were dealing with large numbers, heterogeneous agents, and in many instances with high discount rates. How did they cooperate and build institutions that enabled them to achieve social coordination? My former Ph.D. students published award-winning books on pirates (Peter Leeson) and on prisoners (David Skarbek) for example, as well as the evolution of modern financial practices (Edward Stringham). This ability to solve these problems, in turn, resulted in unleashing the path to economic growth (see Ben Powell’s Out of Poverty (2014)). All of these studies were published in journals such as the Journal of Political Economy and American Journal of Political Science and with academic publishers such as Cambridge, Princeton, Oxford, and Stanford. It has been a productive research endeavor and continues to be.
Different scholars focus on the different legs — the economic/financial tend to be focused on entrepreneurship; the political/legal tend to be focused on public choice and political economy; the social/cultural tend to be focused on economic sociology and cultural economy. Then there is the constant effort to integrate the various research findings back into a coherent picture of a robust political economy, or as I mentioned above what my colleague Richard Wagner now calls “entangled political economy.”
That brings me back to what I said earlier about the analytical approach which seeks to weave together rules and strategies; situations and preferences; and variation and selection to form a social science that can address the deep questions you are asking about human sociability and the “good society”. This is, I think, the foundation of our common ground, and we seek to avoid both under- and over-socializing our theories, and the easy dichotomies that have plagued communication efforts in the past between scholars who share a passionate concern with the betterment of humanity through time.
DSW: Right! This is indeed the foundation of our common ground. Of contemporary nations, which provide the best examples of a sturdy three-legged stool? What is your advice for making the American stool more sturdy? What are the best books to read on this subject?
PB: I don’t know if I can answer in any surprising way your first question. It would be the high trust countries, low corruption countries — without endorsing the databases unequivocally (see e.g., https://ourworldindata.org/trust). What makes for high levels of trust in a society is a very active research topic. Like McCloskey, I am sympathetic to the doux commerce thesis, but I realize that thesis is hard to measure and thus lacks the tractability that other more straightforward measures might yield. Though I would recommend looking at my colleagues Virgil Storr and Ginny Choi’s recent book Do Markets Corrupt Our Morals? (2019) and the data they present from the World Value Survey, etc., as well as from lab results in experimental economics.
The even more intractable problem is how to build the social capital that makes possible a more compassionate community that is simultaneously prosperous and respects each other as dignified equals. Even very high trust societies are experiencing some fraying on significant margins in the last decade due to a variety of reasons, so we see tensions in Nordic countries and Western European democracies, let alone the newly emerged democracies of East and Central Europe, that we never would have expected 20 years ago. As Richard Cornuelle used to put it to me, and others, lots of work for those invisible hands to make a community function as we envision the “good” society to function.
I guess on what works to study, I would look at the Ostroms — Vincent and Lin — and in particular Vincent’s work The Meaning of Democracy and the Vulnerability of Democracies (1997) and of course Lin’s class Governing the Commons (1990), though I would strongly suggest that readers focus first on the last few pages of the book to see the overall agenda as she understood it, and then work backward to her discussion of the “design principles” and what makes for a successful (long and enduring), weak and fragile, and transitioning set of social arrangements to address social dilemmas. Finally, my colleague Paul Dragos Aligica has a very important book on Public Entrepreneurship, Citizenship and Self-Governance (2018) that I think should be on everyone’s shelf. Paul was Vincent’s last student in many ways, and a close associate with the Workshop and really is developing that intellectual tradition in novel and interesting ways.
DSW: There are two more points I would like to cover with you. First, I want to give you the opportunity to talk about police departments from a Third Way perspective. Like disaster relief and recovery, policing is a crucial aspect of modern society that needs to be done well and often goes terribly wrong. This was a special interest of Elinor Ostrom that you have expanded upon in your own work. How did cultural evolution get us into the problems associated with policing and how can cultural evolution, appropriately managed, lead to solutions?
PB: Well the Ostroms’ developed their unique approach — the Bloomington School, or Institutional Analysis of Development — in the context of local public economies. They were deeply engaged in what was called the Metropolitan Reform debate of the 1960s. This movement wanted to consolidate public services under the assumption that it would yield significant efficiency gains. They argued against for a variety of reasons which I cannot elaborate on here, but which Paul and I do in our first book on the Ostroms — Challenging the Institutional Analysis of Development (2009) — and police was a major part of that debate. Lin lead a team of researchers that studied in-depth the delivery of police services in various metropolitan areas — Chicago, St. Louis, LA, and Indianapolis. Their finding was that consolidation leads to a focus on output measures of performance, rather than citizen satisfaction with police services.
A critical idea that I suggest your readers really look into is the fundamental idea of co-production in the Ostroms discussion of local public goods and services. What is, e.g., public safety? And, can public safety be realized without active participation of the citizens who live in those communities? If our hope is to live in prosperous societies with caring communities, we have some work to do to make sure that the right principles of governance are in operation — principles that enable citizens to govern with officials, rather than be governed over by them. Policing is a critical example of important this distinction is for a self-governing democratic society.
DSW: Finally, while I have framed these Third Way conversations in terms of all forms of cultural change, I also try to keep in mind the more narrow topic of entrepreneurship as it is commonly understood. We have talked about the private sector throughout our conversation. Do you have any final thoughts on how the bottom-up vitality that we associate with entrepreneurship can be guided to result in whole-system benefits?
PB: To cite the Ostroms once again, their focus was on public entrepreneurship, but to study it they drew considerably (especially Vincent) on theorists of entrepreneurship like Joseph Schumpeter, Israel Kirzner and Ludwig Lachmann. Of course, William Baumol made major contributions to the field as well. And I would add that Armen Alchian (one of Lin’s teachers) and Harold Demsetz also had significant insights about the role of entrepreneurship in the competitive process. Paul Aligica has some interesting papers dealing with these topics as well they will be valuable to consult. It is this focus on bottom-up processes of self-organization versus top-down command and control that highlights our focus on the necessity for community and social relations to always be accounted for in our analysis. I personally think you can find this emphasis in the works of Adam Smith and F. A. Hayek, and thus you don’t need to search for it in Karl Polanyi and the idea of the moral economy. But these are contested claims. I am a big fan of the work in economic sociology that one finds in thinkers like Richard Swedberg and Viviana Zelizer. Relations before transactions.
I don’t see the market as destroying relations or communities but embedded in them. I do understand that mercantile interests can work with political actors to protect themselves at the expense of others, and in so doing destroy communities and lives. I also know that innovation marches forward, and it too can make obsolete what was once cherished ways of life. I want to see privileges checked, yet innovation to be permissionless. There is a tension in that position, though I hope not a contradiction. And, it is in the tensions and teasing them out that I think we make progress in our quest to understand the human condition.
I appreciate your willingness to have this conversation with me, and I hope our joint effort to understand the human condition may provide some basic insights that will improve the human condition over time. Thank you.
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